Wednesday, January 8, 2014

Seventh Circuit Addresses Coverage Under Workers’ Comp Policy

In
its recent decision in YKK USA, Inc., v.
Safety Nat’l Cas. Corp., 727 F.3d 782 (7th. Cir. 2013), the United States
Court of Appeals for the Seventh Circuit had occasion to consider whether an
employee’s common law claim for negligence against its employer qualified as a
claim under “Employers’ Liability Laws” in order to satisfy an excess workers’
compensation policy’s insuring agreement.

TKK
USA was named as a defendant in an underlying suit alleging negligence brought
on behalf of a former employee who became ill and eventually died from
mesothelioma. TKK gave timely notice of the lawsuit to its excess workers’
compensation carrier, Safety National. TKK retained primary responsibility for
defending, settling, or paying claims up to $275,000 per occurrence. TKK
incurred more than $400,000 in legal fees before it settled with the plaintiff
in the underlying suit. Safety National denied coverage to TKK, taking the
position that the claim of negligence in the underlying suit was not brought
under “Workers’ Compensation or Employers’ Liability Laws,” but instead was a
common law claim not covered under its policy.

The
Safety National policy covered excess “Loss” sustained by TKK. The policy
provided:

“Loss”—shall mean actual payments legally made by the EMPLOYER
to Employees and their dependents in satisfaction of: (a) statutory benefits,
(b) settlements of suits and claims, and (c) awards and judgments. “Loss” shall
also include Claim Expenses, paid by the EMPLOYERS, as defined in Paragraph (2)
of this section.”

“Claim
Expenses” were central to the Court’s determination, and was defined as:

Interest upon awards and judgments and the reasonable costs of
investigation, adjustment, defense, and appeal…of claims, suits or other
proceedings brought against the EMPLOYER under the Workers’ Compensation or
Employers’ Liability Laws [of Illinois] … for bodily injury or occupational
disease … even though such claims, suits, proceedings or demands are wholly
groundless, false, or fraudulent … .

The
Safety National policy did not define the phrase “Workers’ Compensation or
Employers’ Liability Laws”. Also relevant to the issue before the Court was the
Illinois Workers’ Occupational Disease Act (“ODA”), a statute that provides the
exclusive remedy for employees who contract workplace diseases (or suffered
workplace injury), but bars common law claims. The ODA thus provided a complete
defense for the common law negligence claims by the plaintiff.For reasons unknown, TKK failed to assert the
affirmative defense in response to the claim.

Safety
National argued that because the ODA provided the only form of recovery for the
claims in the underlying lawsuit, and the lawsuit did not request relief under
the ODA, the costs of defending and settling the lawsuit did not qualify as a
“Loss sustained by the EMPLOYER because of liability imposed on upon the
EMPLOYER by the Workers’ Compensation or Employers’ Liability Laws” of
Illinois. TKK countered that the underlying claims for loss fit within the
coverage grant for claims under “Workers’ Compensation or Employers’ Liability
Laws.” TKK argued further that the fact that it had an affirmative defense
available did not have an effect on coverage under the Safety National policy
because the policy provided coverage for “claims, suits, proceedings or
demands” that were “wholly groundless, false, or fraudulent.”

Thus,
whether a common law claim for negligence fell within the meaning of
“Employers’ Liability Laws” was central to the Court’s analysis. The Seventh
Circuit recognized that the ODA did not cover all potential common law claims.
Because of these gaps, the Court concluded that “Employers’ Liability Laws”
should not be restricted solely to statutory claims under the ODA. The Court
noted also that to interpret the policy term “Employers’ Liability Laws” so
that it only applied to statutes was too narrow of a construction absent
language in the policy suggesting that the definition was intended to be
limited in such a way. Therefore, the Court affirmed the determinations of the
district court, holding that “Employers’ Liability Laws” was broad enough to
include claims brought under common law, even “groundless claims” for which the
employer appeared to have an affirmative defense.